India threw open its $450 billion retail market to global supermarket giants on Thursday, approving its biggest reform in years that may boost sorely needed investment in Asia's third-largest economy.

The world's largest retail group, Wal-Mart Stores Inc , and its rivals see India's retail sector as one of the last frontier markets, where a burgeoning middle-class still shops at local, family-owned merchants.

Allowing foreign retailers to take stakes of up to 51 percent in supermarkets would attract much-needed capital from abroad and ultimately help unclog supply bottlenecks that have kept inflation stubbornly close to a double-digit clip.

Millions of small retail traders vigorously oppose competing with foreign giants, potentially providing a lightning rod for criticism of the ruling Congress party ahead of crucial state elections next year.

Food Minister K.V. Thomas said the government will allow 51 percent foreign direct investment in multi-brand retail -- as supermarkets are known in India. It will also raise the cap on foreign investment in single-brand retailing to 100 percent from 51 percent, the minister added.

The new rules may commit supermarkets to strict local sourcing requirements and minimum investment levels aimed at protecting jobs, according to local media.

Under fire for a slow pace of reform, Prime Minister Manmohan Singh's embattled government appears to be slowly shaking off a string of corruption scandals to focus on policy changes long desired by investors.

A heavyweight member of Singh's coalition government warned on Thursday it totally opposed opening the sector.

BOLD MOVE

Political opponents of the proposal, with an eye to the ballot box, argue an influx of foreign players -- which could include Carrefour and Tesco Plc -- will throw millions of small traders out of work in a sector that is the largest source of employment in India after agriculture.

India previously allowed 51 percent foreign investment in single-brand retailers and 100 percent for wholesale operations, a policy Wal-Mart and rival Carrefour, among others, have long lobbied to free up further.

India's biggest listed company, Reliance Industries , was forced to backtrack on plans in 2007 to open Western-style supermarkets in Uttar Pradesh after huge protests from small traders and political parties.

The main opposition Bharatiya Janata Party (BJP) opposes opening up the retail sector, arguing that letting in foreign players with deep pockets would bring job losses in both the manufacturing and service sectors.

Fragmented markets give larger options to the consumers. Consolidated markets make the consumer captive, the BJP's leaders of the upper and lower houses of parliament said in a statement before the decision. International retail does not create additional markets, it merely displaces (the) existing market.

(Additional reporting by Nigam Prusty and Krittivas Mukherjee; Editing by John Chalmers)

India